Gladstone Capital Corporation (NASDAQ:GLAD) Q4 2023 Earnings Call Transcript

Gladstone Capital Corporation (NASDAQ:GLAD) Q4 2023 Earnings Call Transcript November 14, 2023

Operator: Greetings and welcome to the Gladstone Capital Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Please proceed sir.

David Gladstone: Okay. Thank you very much. Latanya, this is the 10th time we talked with you on air. This is very nice. This is David Gladstone, Chairman. And this is the earnings conference call for Gladstone Capital for the quarter end and also the fiscal year end of September 30, 2023. Thank you all for calling in. We’re always happy to talk to with our shareholders and analysts that follow us and welcome the opportunity to provide the update with regard to the corporation. And now, we’ll hear from our General Counsel, Michael LiCalsi, who make a statement regarding certain forward-looking statements. Michael?

A professional in business attire discussing finances in a boardroom.

Michael LiCalsi: Thanks, David. Good morning, everybody. Today’s report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-K, 10-Q and other documents that we file with the SEC. You can find them on the Investors page of our website at gladstonecapital.com. While you are on there you can also sign up for our e-mail notification service.

You can find the documents on the SEC’s website as well www.sec.gov. Now, we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. And just a reminder, today’s call is an overview of our results so we ask that you review our press release and Form 10-K, both issued yesterday for more detailed information. Again, go to the investor’s page of our website to find them. Now I will turn the call over to Gladstone Capital’s President, Bob Marcotte. Bob?

Bob Marcotte: Thank you, Michael. Good morning and thank you all for dialing in this morning. I'll cover the highlights for last quarter and the fiscal year ended September 30 and conclude with some commentary as we look forward into fiscal 2024 before turning the call over to Nicole Schaltenbrand to review the details of our financial results for the period. So beginning with the last quarter results, originations last quarter below trend in total 27 million mostly due to existing portfolio companies as we enter the quarter, closely managing our overall leverage with a cautious view on investment leverage levels in the face of slowing price escalation and elevated interest rates. Prepayments have been modest this year, however, we did have one sizable prepayment from Encore Dredging, which combined with the portfolio amortization resulting in a $13 million decline in our ending investment balance as of September 30.

Short-term SOFR rates increase 30 basis point on average over the quarter, and with a primary reason the weighted average yield on our investment portfolio rose to 13.8%. The average earning assets for the period also increased 3.7% and the two combined to increase total interest income by 6.7% to 23.3 million for the quarter. Borrowing costs rose slightly as average bank borrowings declined with the proceeds of the lower cost GLADZ baby bond issuance in August. As a result, our net interest income rose 1.3 million to 17.1 million for the quarter. Deal closing and advisory fees fell with the modest originations and management fees rose by 1.5 million given the reduced fee credits to 5.6 million for the period. Despite the $2.1 million decline in fee income and deal closing and advisory fee credits, net investment income came in at 11 million or $0.28 a share for the quarter, which was down 700,000 from the prior quarter.

The net realized and unrealized gains on the portfolio for the period totaled 2.1 million, which lifted our ROE for the quarter to 13.7% and 11.9% for the last 12 months. Consistent with our outlook for significant growth of private credit within the lower middle market over the next couple of quarters, we elected to capitalize on significant investor demand into our common stock ATM program, and issued 4.9 million shares last quarter, which generated proceeds of 48.3 million and increased our NAV to 49 million or $9.39 per share. With respect to the portfolio. The portfolio continues to perform well, with senior debt representing 73% of the portfolio and we ended the quarter with only one non-earning asset representing 6.1 million, that cost 0.4% of assets at fair value.

We continue to prioritize our portfolio monitoring in areas where revenue headwinds appear to be most prevalent which seems to be mostly consumer facing sectors which is a small portion of our overall investments, and thankfully our couple of exposures to the auto segment were relatively unaffected by the recently settled strikes. Appreciation for the quarter of 2.1 million was driven by the equity appreciation of our position in a manufacture of defense related electronics which is partially offset by the depreciation of a handful of senior debt positions most of which are private equity sponsored with significant underlying equity support. In reflecting on our 2023 performance and outlook for what is now our fiscal 2024, there are a couple of comments I'd like to leave you with.

While 2023 deal activity has been volatile, we've been able to grow our investment portfolio by 10% to over 700 million while still maintaining our focus on investing in growth oriented lower middle market companies and broadening our private equity network in the process. Today our portfolio is comprised of over 50 companies and our core portfolio represents companies with an average EBITDA of approximately 11.7 million. We've maintained our underwriting rigor and are fortunate to have our portfolio heavily weighted to senior secured loans with relatively low pick and non-earning assets. With the expectation of the continued growth opportunities inside the portfolio and the growth of private credit market more broadly across the lower middle market, we've ended the quarter with a very conservative leverage position at just 74% of NAV, and ample availability under bank credit facility.

So we are very well positioned to grow our earning assets as the primary driver of our net interest income growth and shareholder distributions in the coming year. And now I'll turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital to provide more details on the fund’s financial results for the quarter.

Nicole Schaltenbrand: Thanks Bob. Good morning everyone. During the September quarter, total interest income rose 1.5 million or 6.7% to 23.3 million based on the increase in short-term rates and an increase in earning assets. The weighted average yield on our interest bearing portfolio rose 30 basis points to the 13.8% with the increase in floating rates on the 89% of the investment portfolio that carries floating rates. The investment portfolio weighted average balance increased to 668 million, which is up 24 million or 3.7% compared to the prior quarter. Other income declined to 500,000 and total investment income rose 900,000 or 4.1% to 23.8 million for the quarter. Total expenses increased by 1.6 million quarter-over-quarter as net base management fees rose 1.7 million with the reduced deal closing and advisory fee credits.

Net investment income for the quarter ended at September 30th was 11 million, which was a decrease of 700,000 compared to the prior quarter or $0.28 per share which exceeded the $0.2675 per share dividends paid. The net increase in net assets resulting from operations was 13.1 million, or $0.33 per share for the quarter ended September 30th, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. With respect to the full fiscal year, total investment income for 2023 was 86.4 million which represented an increase of 23.3 million or 37% over the prior year. The year-over-year increase was primarily due to the 21.2% increase in the weighted average principal balance of our interest bearing investment portfolio and the increase in the weighted average yield from 10.4% during the year ended September 2022 to 13.3% during the year ended 2023.

Expenses increased 14.5 million or 47.1% in 2023, as compared to the prior year. This increase was primarily due to a 7.9 million increase in interest expense on borrowings and a 3.2 million increase in the net incentive fee. Net investment income for the year ended September 30, 2023 was 41 million, an increase of 27.1 million as compared to the prior year or $1.10 per share. The net increase in net assets resulting from operations was 42.7 million or $1.14 per share for our fiscal year ended 2023, compared to $19.9 million or $0.58 per share for 2022. The current year increase was driven by net investment income and 12.7 million in net realized gains, partially offset by 11 million in net unrealized to depreciation. Moving over to the balance sheet.

As of September 30th, total assets declined to 720 million consisting of 705 million in investments at fair value and 15 million in cash from other assets. Liabilities declined to 311 million and consisted primarily of 253 million of senior notes including the 57 million of 7.75 GLADZ baby bond due September of 2028, which we closed during the quarter. And advances under our $223 million line of credit declined to 48 million as of the end of the quarter. As of September 30th net assets rose by 50.7 million from the prior quarter end with the net proceeds from common share issuance under our ATM of 48 million, and our undistributed earnings. NAV rose from $9.27 per share at the end of the prior quarter to $9.39 per share as of September 30th.

Our leverage as of September 30th declined with a common suck issuance and debt reduction to 74% of net assets. And subsequent to September 30th we closed an $11 million secured first lien debt and preferred equity investment and quality environmental. With respect to distributions, in October our Board of Directors declared monthly distributions to common stockholders of $0.0825 per share per months for October, November, and December, which is an annual run rate of $0.99 per share. The Board will meet again in January to determine the monthly distribution to common stockholders for the following quarter. At the current distribution run rate for our common stock and with the common stock price at about $9.98 per share yesterday, the distribution run rate is now producing a yield of about 9.9%.

And now I'll turn it back to David to conclude.

David Gladstone: Well thank you, Nicole. Nice presentation and Bob, a good year. Michael did a nice job to presenting things that will help our analyst and stockholders understand who we are and what we've been up to. In summary, it was another solid quarter and a solid fiscal year for Gladstone Capital. For the year the company delivered some impressive results, 25% growth in average earning assets, 27% growth in net investment income, 11.9% return on equity, and 22% increase in the common stock distribution rate. Very nice numbers. While the fiscal year 2023 results were good, the company also is very well positioned for the coming year as the portfolio is in good shape, modest leverage, and very low non-performing assets.

As a strong balance sheet today to support further growth and I think we'll get good growth for this new year, fiscal year 2024. In summary, the company continues to stick with its strategy of investing in growth oriented low middle market -- lower middle market businesses with good management. Many of these investments are in support of mid-size private equity funds that we have been friends with for many years, and they're looking for an experienced partner to support their acquisition and growth of that business, which they've invested in. This gives us an opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders. We love to pay dividends, and I love that since I'm a shareholder.

And I'm going to turn it back over to our -- the lady who's handling this, Latanya, and we'll get the operator to tell callers how they can ask for a question.

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